Successful Rollovers

What plan sponsors should know about automatic rollovers—and where to find help

Plan sponsors have long wondered what best practices are in handling terminated, missing and lost plan participants. One option for defined contribution (DC) and defined benefit (DB) plan sponsors, at least for those with terminated participants that have account balances of $5,000 or less and provide no direction for those funds, is to automatically roll such participants out of the plan and into a safe harbor individual retirement account (IRA). However, for plan sponsors, the selection of a provider for such a service requires the proper due diligence and can be challenging. In recognition of the need for plan sponsors to get help in the practical movement of assets when rolling participants out of the plan, Wealth Management Systems Inc. (WMSI) has partnered with multiple IRA providers to offer a bundled automatic rollover solution for plan sponsors.

To discuss the current state of the automatic rollover space, PLANSPONSOR Editor-in-Chief Alison Cooke Mintzer spent time with John Geli, CEO of WMSI, and representatives from three WMSI partner firms: Terry Dunne, managing director of the automatic rollover solution at Millennium Trust; Lowell Smith, president and founder of Inspira; Bill Cassidy, senior vice president and managing director at The Bancorp’s Institutional Banking division; and the Safe Harbor IRA Services Solution Manager at The Bancorp Bank, Derick Shaffer. They discussed how adding automatic rollover provisions to a retirement plan can help plan sponsors, as well as what characteristics make a good partner and IRA provider for rollovers from DB and DC plans.

PS: Why should a plan sponsor consider automatically rolling over terminated, small plan balances of $5,000 or less into a safe harbor individual retirement account?

Geli: With 47% of plans adopting auto-enrollment provisions, the number of small-balance accounts left behind by terminated employees is on the rise. You now have participants who may not realize that they’re in a retirement plan. So, they don’t always think about what they should do with their savings when they leave—and over time these accounts can increase plan expenses, administration and fiduciary responsibility, etc., if not addressed.

Smith: We talk to our clients about a few primary reasons: One, terminated employees are hard to communicate with; they get lost. Second, as a result, those participants tend to drive up the cost of the plan in additional recordkeeping fees—that is, for maintaining these terminated employee accounts.

The third issue is fiduciary responsibility. Plan sponsors do have to communicate with terminated participants and treat them as they would any other active participant in the plan—providing disclosures and pertinent information. In most cases, when companies’ retirement plans get sued, these lawsuits typically don’t come from active employees, they come from terminated employees.

Cassidy: Expense control and risk management. For smaller companies, audit and Internal Revenue Service (IRS) reporting regulations have increased for plans that have over 100 participants. So, employers may want to distribute small-balance accounts to reduce the participant count to less than 100—eliminating the expense of auditing for some plans.

Dunne: In all cases—whether it’s an active, terminated or even an abandoned plan—once the IRA rollover happens, the individual is no longer considered a participant in the original plan, and the plan sponsor has satisfied its fiduciary duty. Basically, the plan fiduciaries then are no longer responsible for or required to keep track of the individual. This is a very significant burden that’s being released for the plan sponsor.

There is a benefit to plan participants, too. Many of these individuals are missing, and the IRA provider reunites the participant with his or her retirement money.